The fifth phase of America’s Financial Endgame™ is a regress toward a sustainable economic growth trajectory. This is the proverbial “light at the end of the tunnel” of the continued financial crisis that is likely to develop from America’s current fiscal and economic condition.
The reason why this “turn” will occur is because the crisis will dismantle the machine of malinvestment that is created by government and corporate bureaucracy. The reason why bubbles form in the first place is because distorted incentives push capital into certain projects that do not justify investment on their own merits. From there, the excessive returns attract more capital in a self-repeating cycle until prices eventually get so high that no new buyers can be found.
The result is a collapse in prices from the forced selling of people who purchased with borrowed money. As this process unfolds, the prices will eventually be pushed back to reasonable levels, and will frequently be pushed to unusually low levels because of all the deleveraging in the marketplace.
At the end of this process, the new capital that will be flowing in to purchase the assets at depressed prices is the proverbial “smart money” that has sat on the sidelines during the speculative bubble. This is the way that a free market systematically re-distributes capital from poor uses to better purposes. Joseph Schumpeter referred to this process as “creative destruction” … it is the way that economic progress unfolds. Capital must be systematically allocated to its highest and best use for the economy to continue growing. When a regulatory structure emerges that hinders this process, it results in a price distortion that eventually must be worked out of the marketplace.
The process of working out these distortions is frequently painful for many businesses and individuals. However, it is what lays the foundation for America’s return to a sustainable trajectory of economic growth. After the decades of fiscal irresponsibility and financial market bubbles that ultimately lead to a horrific crash, a bottom will eventually form. This bottom will be the result of capital inflows from sources that were not a part of the speculative frenzy.
This is the fundamental lynchpin of the sustained growth trajectory. As capital systematically moves from low value uses to higher value uses, the fortunes of the national economy will strengthen.
The first step in this process is the stabilization of money around either a commodity standard or fixed growth rules.